8 Debt Consolidation Facts You Need to Know

Chonce Maddox

Chonce is a Certified Financial Education Instructor and freelance writer who loves to talk about everything personal finance. Her writing work has been featured on Business Insider, LendingTree, Credit Sesame and Barclaycard.

Are you struggling to manage your debt? If you are feeling overwhelmed by the burden of your debt and unable to make on time and consistent payments, you might want to consider debt consolidation.

Debt consolidation loan programs allow you to combine various different balances that you owe into one monthly payment and one interest rate. Debt consolidation can help lighten your burden and help make repaying your debt much more attainable. However, there are quite a few myths about consolidation and misinformation out there that could lead you to misunderstand what debt consolidation is, how it can or won’t help you, and when you should consider it as a relief option.

2. When you consolidate your debt, you have a new lender

Debt consolidation is often done through a third-party payment system. Once you consolidate your debt, you will no longer make payments to your lender and you will start paying the agency or company you are working with who will then pay your creditors. They often have positive relationships and arrangements with financial lenders, allowing them to offer lower interest rates and act as the middleman as you pay off the remainder of your debt.

3. There are two types of consolidation loans

The two basic types of consolidation loans are secured and unsecured. Secured loans are usually related to an asset like a home, car or piece of property and used as collateral if you were to default on your loan. Unsecured loans are not tied to an asset and are based mainly on your credit history if you are considered a high-risk borrower.

4. You may not secure the interest rate that was advertised to you

Keep in mind that those low and appealing rates advertised may not be available to you if you don’t have great credit. Some good rates are only available for a limited time also so it’s important to research and ask what your exact interest rate would be.

5. Credit counseling and debt consolidation are not one and the same

The terms credit counseling and debt consolidation often get intertwined, but there are quite a few key differences. Credit counseling agencies employ certified counselors who can help you create a budget and a new plan to help you get out of debt. Credit counseling tends to look at your finances as a whole and not just your debt alone.

A credit counselor may recommend debt consolidation to help improve your finances. In that case, you can apply to consolidate your debt on your own or ask a certified counselor to help you find a consolidation solution that will help improve your situation. Some credit counseling agencies offer debt consolidation programs, but you should always do your research and shop around to ensure you are working with a company that can help meet your needs.

6. You can’t consolidate Federal and private student loans together

All Federal loans can be consolidated together into one balance and one lower interest rate. You’re typically eligible to consolidate your Federal student loans after you’ve graduated, left school or are enrolled less than part-time according to the Federal Student Aid office.

If you have private loans as well, you will have to consolidate or refinance them separately. You can, however, refinance both your Federal and private student loans together. Refinancing gives you one new loan with a new interest rate. Consolidation, on the other hand, combines all of your loans into one. You’re not actually taking out a new loan. Keep in mind, though, that if you do refinance Federal student loans you will no longer be eligible for loan forgiveness programs.

7. Credit counseling agencies are not all nonprofit and may charge fees

Most credit counseling agencies are nonprofit organizations according to the Consumer Financial Protection Bureau, but many of them can be for profit as well. Credit counseling agencies tend to charge administrative fees for their services or even an upfront fee for debt consolidation and this helps keep their business running. Yet and still, choosing between a nonprofit and for profit isn’t always about the fees and you should take time to compare everything as a whole to ensure that you are working with someone who can help you make your debt payments more affordable.

8. You have to stop accumulating debt in order to consolidate

In order to be considered for debt consolidation plans, you need to agree to refrain from accumulating more debt during the repayment process and close your accounts once your debt is repaid. Ultimately, it makes sense to avoid adding more debt while you are working with a consolidation program to successfully pay back the debt you already have.

Keep these debt consolidation facts in mind if you are considering consolidating any type of debt, whether it’s credit card debt or student loans. For a second opinion, you can always speak with a debt consolidation expert and compare loans to determine the best way to go about reducing your debt.